Archive - May 2011 - Story

Following last week's news that as we suggested US stagflation is starting to shift to China, SocGen's Patrick Legland looks at the consequences of what a Chinese slowdown in H2 would look like for the country, and the world. Cutting to the chase: buy Chinese CDS, and sell hard commodities. That said, the risks to the global economy, should China implode, are far vaster, and we fail to conceive how the central planning cartel would ever allow this to happen, or the PBoC for that matter, considering today's earlier news of not one but two failed Chinese auctions.

As Daily Telegraph reporter Jon Swaine notes via Twitter, DSK has been denied bail, and has been remanded to stay in custody until the next grand jury hearing which is due for May 20. Looks like DSK will now be mugshotted and stay in jail for 4 days. And so the IMF continues to be headed by a man about to spend 72 hours in prison.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

ABC has released the details of the full complaint issued against DSK: "International Monetary Fund chief Dominique Strauss-Kahn allegedly forced a New York City hotel housekeeper to perform oral sex and submit to anal sex, in addition to allegedly attempting to rape her, according to a complaint filed today by the office of Manhattan District Attorney Cyrus Vance. The complaint charges him with two counts of criminal sexual act in the first degree, one count of attempted rape, sexual abuse in the first degree, unlawful imprisonment, sexual abuse in the third degree and forcible touching. The complaint is a terse charging document, less than a full page in length. It charges that he forcibly touched the housekeeper's breasts, attempted to pull off her panty hose, twice "forcibly made contact with his penis and the informant's mouth" and that "the defendant engaged in oral sexual conduct and anal sexual conduct with another person by forcible compulsion."

Well, it's not the Taiwanese animation geniuses from Next Media Animation (yet), but it will do for now. Everyone still confused by what happened to DSK on Saturday is encouraged to watch this animated version (sorry, no bears). Ignore the Chinese: it speaks for itself.

Those seeking the spark that will set off the next middle east conflagration can finally rest easy. Reuters reports that Shi'ite-ruled Iran sent a flotilla to Bahrain on Monday to show solidarity with mainly Shi'ite Muslim protesters, escalating tensions with the island kingdom that is home to the U.S. Navy's Fifth Fleet. As a reminder, Barhain is the nation that imposed a total and complete media blackout, going so far as to expel a Reuters correspondent, while most likely continuing its atrocities against protesting Shi'ites, which has raised the specter of a possible war erupting on the tiny island home, so critical to the US navy, and situated only 60 miles away from the world's largest Gwahar oil field. If Iran is serious about this latest escalation between Shi'ites and Sunnis, and it certainly appears to be, all hell may break loose as this could be the straw that not only breaks the proverbial camel's back but launches a full out Gulf States war (and woe to those short CL in a worst case scenario that sees the involvement of Israel, Kuwait and Saudi Arabia, not to mention all of the the middle eastern countries).

And while the US is no longer allowed to auction off debt, in China the PBoC appears to be no longer able to auction off debt. As Business China reports, "the central bank scheduled the auction of RMB 20 billion worth of
one-year treasury bonds and RMB 10 billion in six-month bonds on the
country’s interbank bond market for May 13. But banks, faced with tight
liquidity, only purchased RMB 11.71 billion worth of one-year bonds and
RMB 9.63 billion worth of six-month bonds, the report said." In other words, there was a nearly 50% miss on the 3 month auction. The key reason: "The reference yield of one-year treasury bonds was raised to 3.0246% from the previous issuance, while the bond yield of 182-day discounted treasury bonds was 2.91%, the paper said." It appears investors don't agree with the central planners that 3% is an appropriate rate to compensate them for surging inflation. That, and also the fact that banks suddenly have no liquidity: "Tighter liquidity was behind the under-subscription, as the central bank resumed selling three-year notes on May 12 after a hiatus of more than five months, a bank analyst who was not named was cited as saying. The central bank also raised banks’ RRRs by 0.5 percentage points on the same day, effective May 18, the fifth consecutive month its has raised RRRs this year." And so the Catch 22 emerges: the more China fights inflation through RRR or rate hikes, the lower the purchasing power of domestic banks to purchase bonds (and yes, the US deficit is just a few hundred billions dollars too wide for it to come to China's rescue). Should the "15 minute" inflationary conundrum continue to express itself, and China be forced to rise rates even longer, very soon the country, just like the US to which it is pegged monetarily, will also be unable to raise any incremental capital.

Stocks appear to have largely ignored the technical default of the US (fire and brimstone warnings from the tax expert notwithstanding), and instead appear to be tracking the EURUSD tick for tick, as every algo continues to be an inverse USD "hedge." Earlier today, Goldman's Thomas Stolper, who is danger of once again appearing rather foolish with his 1.50 EURUSD call (despite the pair rising as high as 1.4925 earlier), and has a stop at 1.35, released another note in which he said that while Europe may be insolvent, things are not really all that bad. "It appears FX markets and the Euro play the role of a safety valve
with investors buying protection in case the sovereign situation gets
notably worse...Having said this, apart from the Euro, things seem to stabilise
otherwise. Greek 2yr yields have been stable, slightly below 24 percent
for about 3 weeks and this despite no peripheral bond purchases by the
ECB within the SMP program in recent weeks. Greek stocks appear to be
stabilising at low levels as well, having been on a downtrend for
several months....we remain structurally constructive on cyclical assets, including
stocks and oil, which in turn suggests there could be further upside in
the Euro, induced from cross asset correlations." Ergo, GS is now betting the ranch on a dead cat bounce which will lead the market dominating robots to an IMF like release of buying programs soon enough. And with that we have now seen it all.

With much interest focusing on the organizational structure of the IMF, today Reuters has compiled a useful org chart summarizing the complete flow of executive power at the Washington D.C.-based (for now) developing world (and PIIGS, soon everyone else) rescue organization.

Hopefully the latest confirmation of the housing triple dip will not come as a surprise to anyone: “Builder confidence has hardly budged over the past six months as persistent concerns regarding competition from distressed property sales, lack of production credit, inaccurate appraisals, and proposals to reduce government support of housing have continued to cloud the outlook,” said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. “In addition, many builders in this month’s survey cited high gas prices as a further contributor to consumer anxiety and reluctance to go forward with a home purchase.” As a result, NAHB builder confidence remained at 16 in May, despite hopes and prayers that after six months at this low level for 6 months in a row.

As GS summarizes the week ahead in politics, it will be "a somewhat quiet week, with the House on recess and energy legislation on the Senate floor; fiscal debates will continue in the background, with possible action in the Senate on competing budget plans starting later this week…" In other words, the soap opera on the debt limit will soon start getting very interesting.

It's official: the US credit card has officially been maxed out, just as we predicted on Wednesday, and throughout Q1 and Q2. The United States is expected to reach the legal limit on its debt later on Monday and will start dipping into federal retirement funds to give the country more room to borrow, a Treasury official said. As Reuters reports further, The U.S. Treasury will settle $72 billion in maturing bonds on Monday, which will push the country right up against its $14.294 trillion borrowing cap, the official said. To all those who thought only the insolvent government of Ireland will plunder pension funds, our condolences.

At 9 am, Treasury released its March TIC data. While the headline number of $116 billion in total net TIC flows was slightly higher than February at $116.0 billion compared to $97.7 previously, the net number (offset by US transactions in foreign securities) missed expectations of $33 billion, printing at $24 billion. Notably, of the $116 billion in foreign flows into US securities, foreign central banks were ($10) billion (and privates were $126 billion), indicating that the central banker cartel may be in need of some additional funding soon. Net foreign purchases of long-term U.S. securities were $54.7 billion. Of this, net purchases by private foreign investors were $44.9 billion, and net purchases by foreign official institutions were $9.9 billion. Foreign holdings of dollar-denominated short-term U.S. securities, including U.S. Treasury bills and other custody liabilities, decreased $18.3 billion. Foreign holdings of U.S. Treasury bills decreased $21.9 billion. And while we will provide a full breakdown later in the day, the key trend in US paper holdings continues to be China, whose total US debt holdings dropped for the 5th consecutive month in a row at $1144.9 billion, and the largest one month decline since November 2010.

One part of space history comes to a close. The shuttle will blast off from Kennedy Space Station any second. It will be Endeavour's 25th and last ever mission.

• Tepco Says Fuel in 2 Reactors May Have Melted (Bloomberg) "The findings at the No. 1 reactor indicate the likelihood
  that the water level readings in the other reactors aren’t
  accurate"
• The Destruction of Economic Facts (BusinessWeek)
• US residents flee sacrificed Mississippi flood towns (BBC)
• 'Dominique Strauss-Kahn Is Finished' (Spiegel)
• IMF in Wake of Scandal Turns to Lipsky (Bloomberg)
• The Known Unknown of Greek Debt (WSJ)
• Greece Aid May Be Clouded by Strauss-Kahn Arrest (Bloomberg)
• Lowe’s Profit Trails Estimates as Home Projects Curbed (Bloomberg), and, you guessed it, bad wearther blamed
• Warning signs on market liquidity risks (Reuters)... pretty much as warned on Zero Hedge in April 2009